Latest Specific Currency Report - Sterling Vs. Aussie Dollar - 26/05/10
A violent bout of risk aversion has swept the markets over the last week as investors dumped the euro on escalating fears over the single currency's future. The Euro has plunged by up to 9% against the US dollar in May, with Sterling notching up a 7% fall over the same period. Investors have been buying into the traditional "safe haven" of the US dollar and Japanese Yen, both of which have strengthened sharply in May. The worst affected currency group has been the high yielders like the Australian dollar and South African Rand. These are the currencies that benefitted most over recent months as investors sought risk and higher returns. As those positions are unwound, these currencies have been hard hit, with the Aussie dollar falling by 12% against the US dollar in May.
The FTSE 100 index of leading UK stocks has plunged by over 15% over the last four weeks, wiping out billions in market value and prompting investors to reassess their attitude to risk. The Euro has failed to take comfort from the €750bn stabilisation package backed by EU countries, the EU and the IMF. There is open talk of whether any countries will exit the single currency, and what steps would need to be taken in order to achieve an exit. A speech by German chancellor Angela Merkel announced a ban on naked short selling of certain securities, but her acknowledgement of the seriousness of the Euro's crisis sent markets nose diving around the world. The rumour mill was given fresh fuel on Monday when the Spanish government nationalised a small savings bank.
On the data front, UK retail sales rose 0.3% in April, but markets barely noticed. Minutes from the latest Bank of England meeting confirmed the view that interest rates will stay low for while yet. Again, no reaction. The sole focus for Sterling right now is the emergency budget to be announced on June 22nd. Investors are looking for information on how bad the deficit is, and what measures will be taken to address it. Until we have a clear fiscal tightening plan in place, sterling will struggle to sustain credibility while investors remain nervous. However, while the wider financial crisis is still the main headline, the Aussie dollar will struggle even more than sterling as traders continue to sell high yielding assets.
This is presenting an opportunity for clients who have Australian dollar requirements over the next year. The exchange rate has improved by up to 9% since touching record lows on May 13th. The last few days have been spent consolidating close to the highs. The big question is whether this dramatic move is likely to continue, or whether it will ebb away just like similar counter trend rallies over the last 2 years. A balanced strategy would be to cover half of any Aussie dollar requirement here, and place a stop order on the balance to protect against a sudden deterioration in the exchange rate.
Alternatively, for those with more appetite for risk, consider placing a stop order on the whole amount in the hope that the exchange rate goes higher again once the currency pause resolves itself. The danger is that if stock markets recover their poise and volatility diminishes, the high yielding currencies could come back into vogue very quickly.
Latest Specific Currency Report - Sterling Vs. Aussie Dollar - 20/05/10
The Australian dollar plunged over the last 48 hours as global investors shun risk and move money away from high yielding currencies and into the US dollar and the Yen. This is an unwinding of the so called "carry trade". The Australian dollar has long been a favourite of investors, who borrow money in low interest rate currencies (Yen, US dollar) and reinvest the proceeds into Australian dollars which provide a yield of 4.5%.
As long as the Australian dollar continues to strengthen, investors make an interest return and also a capital gain when they come to convert the currency back and repay the loan. However, if the exchange rate moves against the carry trade, investors are quickly pushed into a loss making position as adverse currency movement wipes out the potential interest rate gain of holding the higher yielding currency. As the carry trade has been a highly popular trading strategy in recent months, there is a large crown of speculators who are holding Aussie dollars purely for a potential short term gain.
As the currency weakens, these traders exit their losing trades, selling the currency lower in what can become a self fuelling spiral or "squeeze". This carry trade behaviour has resulted in a steady uptrend for the Aussie dollar, characterised by short sharp corrections in which the GBP/AUD exchange rate can rocket in just a few days, only to then gradually sink back to new lows. The last major spike was back in early 2009 and then October 2008 when the markets were in the throes of the credit crisis.
Economic factors such as Australia's decision to raise a special tax on mining companies, and a growing belief that the Reserve Bank will now keep interest rates steady after a string of recent rises have been pointed to as reasons for the Aussie dollar's weakness; but the carry trade certainly exacerbates the move we are seeing.
Clients with Aussie dollar requirements should be especially vigilant now. There is an opportunity to hedge exposure at far better levels than have been available for the last few weeks, and there is no way of knowing how far the current price spike will take us. Clients may want to hedge half their risk now, and take a "wait and see" approach from there; or another strategy would be to place a stop order below the market in case the exchange rate falls back.
Latest Specific Currency Report - Sterling Vs. Aussie Dollar - 10/05/10
Sterling was looking firmer heading into last week's election, rallying to an eight week high against the Aussie dollar on Thursday. The gains faded into the end of the session though, and things went from bad to worse on Friday when it became clear that no new government would emerge for at least a few days. The market had been pricing in some sort of outcome leading into the vote, and the dramatic renewal of uncertainty on Friday was a big disappointment. Sterling took fright, and plunged to test the eight week lows, recovering to end the session unchanged. In fact, over Thursday and Friday we saw enormous volatility, but ultimately we ended the week at the same level as we were trading on Wednesday. Evidence that the market simply does not know how to interpret the latest developments! There seems to be more direction this morning, so far to the downside. Sterling has lost two cents already today.
Meanwhile, the Reserve Bank of Australia raised interest rates for the sixth time since October last week, taking the benchmark rate to 4.5%. That move was widely expected, and helps to keep the currency on the front foot, but in jobs advertising data released today there are early signs that the rate hikes are starting to cool the rate of economic recovery. Job advertising fell slightly in April, but was still nearly 15% higher year on year. Australian Treasurer Wayne Swan made optimistic comments on Monday ahead of the budget he is expected to release on Tuesday.
The technical outlook remains negative. We are still trading in a sideways range close to record lows, and the Pound's apparent inability to sustain moves above the 1.6675 resistance is worrying. We could see new lows at any time unless Sterling can drag itself out of the doldrums and stage a broad based rally. The Aussie dollar is likely to remain in demand, especially after the Greek bailout has calmed investors' nerves and increased the appetite for high yielding assets.
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